Why the term “Expat Tax” is a misnomer
“Expat Tax” suggests that the new amended to section 10(1)(o) of the Income Tax Act will, as quoted by a reputable business publication, have hard-hitting consequences for South African citizens plying their trade abroad. This is misleading and mostly incorrect. To qualify my rather strong views about this, we need to look at what constitutes a South African resident for tax purposes and what their tax liabilities in South Africa are.
South Africa residents are taxed on their worldwide income, regardless of the source of that income, whilst non-residents are only taxed on their South African sourced income. The term resident is defined in the Income Tax Act as anyone who is ordinarily resident (loosely regarded as anyone who considers South Africa to be their true home and intend returning) or who meets the requirements of the physical presence test, but does not include anyone who is deemed to be an exclusive resident of another country in respect of the double tax agreement entered into between South Africa and another country. We can assume, for purposes of this discussion that all expats will be deemed to be ordinarily resident in South Africa, but will most likely also be considered a resident of another country provided that it spend sufficient time in the said jurisdiction: the United Kingdom have a statutory residence test, which will deem you to be resident if you spend more than 183 days in the United Kingdom, whilst Hong Kong will deem you to be resident of Hong Kong if you spend more than 180 days in the country. Most jurisdictions have similar provisions contained within their tax legislation.
The OECD’s model convention on Income and Capital recommends a tie-breaker test which is incorporated in most of South Africa’s double tax agreements. This tie-breaker test provides a test to determine the exclusive residence of an individual who is deemed to be a tax resident of both countries.
A Permanent Home
The test gives preferences to the country in which an individual has a permanent home available to her or him. As regards to the concept of a home, it should be observed that any type of home may be taken into account (house or apartment or furnished room belonging to or rented by the individual) provided that there is a degree of permanence attached thereto. For instance, a house owned by an individual cannot be considered to be available to an individual where a house has been rented out and effectively handed over to an unrelated party. If the individual’s tax residence cannot be determined by a permanent home (because you have a permanent home available in either or neither of the countries), one will look at the individual’s closer personal and economic relations. In the unlikely circumstances of the issue still being unresolved, one will need look at the individual’s habitual abode and nationality before ultimately requesting the authorities of the two countries to settle the dispute by means of mutual agreement.
The result being that most South African expats living and residing on a permanent basis abroad will be deemed to be an exclusive resident of that country and a non-resident for South African tax purposes. This means that the South African Revenue Services will only be able to tax you on your South African sourced income and the new amendment to section 10(1)(o) of the Income Tax Act will have no effect on your tax affairs.
Our recommendation to all current and future “Expats” will be to seek professional advice to determine your tax residence, before taking any drastic steps such as financially or physically emigrating from South Africa which will carry very limited weight in the determination of your tax residence.